Financial reporting systemA subsystem of accounting that
produces financial statements and other reports for external
stakeholders.
Fiscal yearThe annual accounting period adopted by a
business.
General ledgerThe group of accounts of a business.
JournalThe record in which the effects of transactions are
recorded in chronological order.
Journal entryThe transaction record entered in the journal.
JournalizingThe process of recording transactions in the
journal.
Management reporting systemA subsystem of account-
ing that provides internal information to assist managers in
making decisions.
Natural business yearThe fiscal year that ends when a busi-
ness’s activities reach their lowest point in the operating cycle.
Normal balance of an accountThe debit or credit side of
an account used to record increases.178 Chapter 4 Accounting Information Systems
Permanent accountsAccounts that are reported on the
balance sheet and whose balances carry forward from period
to period.Post-closing trial balanceThe trial balance prepared after
the closing entries have been posted to the ledger.PostingThe process of transferring the debits and credits
from the journal entries to the accounts in the ledger.Rules of debit and creditStandardized rules for record-
ing increases and decreases in accounts.Temporary accountsRevenue, expense, and dividend ac-
counts whose balances are transferred to retained earnings at
the end of the period.Transaction processing systemA subsystem of account-
ing that records and summarizes the effects of financial trans-
actions on the business.Trial balanceA summary listing of the accounts and their
balances in the ledger.ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM
J. F. Outz, M.D., has been practicing as a cardiologist for three years in a professional corpora-
tion known as Hearts, P.C. During April 2007, Hearts completed the following transactions.
Apr. 1 Paid office rent for April, $800.
3 Purchased equipment on account, $1,575.
5 Received cash on account from patients, $3,150.
8 Purchased X-ray film and other supplies on account, $245.
9 One of the items of equipment purchased on April 3 was defective. It was returned
with the permission of the supplier, who agreed to reduce the account for the
amount charged for the item, $325.
12 Paid cash to equipment supplier on account, $1,250.
17 Paid cash for renewal of a six-month property insurance policy, $370.
20 Paid cash to laboratory on account, $200.
24 Paid cash for laboratory analysis, $545.
25 Recorded fees charged to patients on account for services performed in April, $5,145.
27 Paid cash dividends, $1,250.
28 Recorded the cash received in payment for services provided to patients during
April, $1,720.
28 Paid salaries of receptionist and nurses, $1,725.
30 Paid various utility expenses, $360.
30 Paid miscellaneous expenses, $132.
Hearts’ accounts and balances (all normal balances) as of April 1 are listed as follows: Cash,
$4,123; Accounts Receivable, $4,725; Supplies, $290; Prepaid Insurance, $465; Equipment, $21,745;
Accumulated Depreciation, $3,100; Accounts Payable, $765; Salary Payable; Capital Stock,
$10,000; Retained Earnings, $17,483; Dividends; Professional Fees; Salary Expense; Rent Expense;
Laboratory Expense; Insurance Expense; Utilities Expense; Supplies Expense; Depreciation Ex-
pense; Miscellaneous Expense.Instructions
- Enter the April 1 balances in standard T accounts. Identify each amount as “Balance.” (Hint:
Verify the equality of the debit and credit balances in the ledger before proceeding with the
next instruction.)